Investors scale back home purchases – who will fill the gap?

Investors are scaling back home buying, according to data released Wednesday, and there’s concern that the gap in purchases won’t be filled as prospective first-time buyers struggle with a choppy jobs market and high barriers to obtaining a mortgage.

Skyrocketing prices over the past year cooled non-institutional investors’ interest in real estate, with these households making up 20% of home purchases in 2013, down from 24% in 2012, according to fresh data from the National Association of Realtors. There’s also evidence that big-time investors are slowing their home purchases. Stephen Schwarzman, chief executive of Blackstone Group, which has bought at least $7 billion worth of houses, recently said his firm’s exposure is large enough.

The housing market may miss investors’ support if first-time buyers don’t step up to the plate. But recently released data show that home sales to young families, who are having a particularly tough time in this housing market, are weak.

“The near-term concern for the housing market is that demand from investors will fade, but first-time home buyers won’t be prepared to take market share as a result of tight credit and years of sluggish income growth,” Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch, wrote in a recent research note. “This could lead to a hiccup in home sales and moderation in home price appreciation.”

One: First-time buyers may not be interested in becoming homeowners. “Opinions have… changed in regards to housing as a store of wealth and a means for financing future expenditures,” Meyer wrote. “For many young adults who are searching for labor mobility and liquid assets, buying a home may not seem as attractive as renting.”

Two: First-time buyers may not be eligible to get a mortgage. “Credit has continued to tighten, which means home ownership has become restricted to a subset of the population,” she wrote.

Indeed, Paul Diggle, property economist at Capital Economics, noted that mortgage applications to buy a home have dropped about 17% over the past year.

“Mortgage demand will have to rise…if mortgage-dependent buyers are going to play a larger role in the housing recovery,” Diggle wrote. “The longer mortgage lending flat lines, the more precarious the housing recovery will
look.”

Also of interest in NAR’s Wednesday data: The share of homes sold as vacation properties to non-institutional buyers rose to 13% in 2013 — the largest chunk in seven years — from 11% in 2012. Meanwhile, the share of homes sold as primary residences increased to 67% — the highest in three years — from 65%.